Golden Bullseye

One of the lessons that gold bugs are learning, in the most painful way possible, is that you can’t trade a manipulated market. When big players with regulatory immunity can move an asset’s price — and can see resistance/support levels and moving averages just as clearly as anyone else — smaller traders don’t stand a chance.

In the gold-is-manipulated script, governments and their bullion bank proxies push the price to levels where they know hedge funds and other traders have stop-loss orders, which kick in and send the price careening lower. Then the manipulators buy back their short positions, thus gaining a two-fer: fleecing the flock for a nice profit, and crushing the spirits of stackers and preppers and regular folks who value honest money.

Which brings us to the following article, published by a major bullion dealer:

Below is a longterm view of gold’s bull market valuation channel over the past 15 years:

We view this current price pullback as a buying gift for gold and silver investors.

Now, for chartist in a normal market this picture would indeed imply a nice trade setup. But bullion bank traders can see this channel too, and for them it’s a bullseye. Just push gold through the bottom of the channel and a whole world of technicians who for some reason think their charts still have meaning will see that the up-channel has been broken, and, like good, dispassionate traders who cut their losses when they’re wrong, will sell their futures contracts, their GLD shares, and maybe their mining stocks, tacking yet another vertical drop onto this correction.

This might not happen, but if it doesn’t it will be because the bullion banks have had their fun and are now on the other side of the trade. But make no mistake, it’s their decision; in the short run this is their game.

Longer term, of course, is a very different story. Fundamentals always win eventually, and with the whole world on a borrow/print/lie-about-it binge, gold’s fundamentals just keep getting better. Excessive debt leads to currency war leads to soaring gold. And when the paper players are finally overrun by physical demand, the people who have been quietly accumulating bullion and high-quality mining stocks will barely remember this month’s drama.

Yeah, it really is a stackers worst nightmare and dream come true all in one. Stackers can see manipulation throughout the economy, financial world, and PM’s. We all can see the technical levels and know the technicals will be used against us to create a break down…but we also know this is the moment we have been saving cash for…and we also know the breakdown will also be the capitulation that is the start of the new bull.

PaperIsPoverty

I just wish I could actually buy silver at this imaginary sub-$23 level. Still, whatever the premiums at the moment, it’s a gift, I agree.

PaperIsPoverty

At this point they have to be scared to push it much lower, lest the demand for physical grow even larger than it already is. As William Kaye pointed out in his interviews, if one major bank (ABN Amro) is in default on gold, really all the big banks are in default, because otherwise ABN could’ve borrowed the necessary bullion. If they couldn’t borrow it, that’s because no one’s got the gold. After all, they’re all in this together when it comes to keeping the metals prices down.

Tony D

Thing is that the ABM Amro default did not even cause a market ripple or much comment at all, especially in the MSM. This is a major blow to stackers who claim that a gold default by bullion banks would cause prices to sky rocket. So far that thesis just hasn’t held up.

I suspect that we will see a manipulated market in PMs right up until the time of a major economic crisis, a game changing crisis, not just a 20% correction in the Dow. It comes back to the concept that PMs are insurance more than an investment.

Steven Pratt

There’s a whole world of whale sized investors who try very hard to keep their actions invisible from the likes of you and I. You wouldn’t be able to accurately comment on this.

I agree with you that the manipulation will continue until it doesn’t. I think only the “old timers” (Embry, Sprott, Turk, Sinclair etc) will not be absolutely jumping out of their skin.

PaperIsPoverty

Some have argued that the gold/silver smash, which I think started less than ten days after ABN Amro’s default, was designed to prevent that sudden rise in price. Obviously you’re right, they were totally successful in circumventing the skyrocketing prices that metals bulls would have predicted. But they did it at a huge cost because it spurred massive physical purchases and it caused some embarrassing moments for them, like gold changing hands in Tokyo at $2000 an ounce and silver coins frequently selling in the mid-30s.

They might keep it under wraps until some game-changing crisis, but they’re making the future (upward) correction to fair value that much more extreme. Which is what they do in every situation: keep it going today at the expense of a bigger shock in the future.

I think the key point here is TRADING in a manipulated market is a losers game. Fortunately, for “gold bugs” and “stackers” and long-term investors this kind of price action doesn’t matter, in fact it keeps things interesting and provides favorable entry points if one is dollar-cost averaging. It’s important though for one to have conviction. If you’re just hedging then you’re liable to get “stopped out” repeatedly and whipsawed, especially if you place standing stop-loss orders, as JR described.

My sense right now is that “investors” are not worried and actually see continued gradual improvement in not only the US economy but globally too, primarily from the developing countries which are responsible for the steady increase in multi-national corporate profits. The worst is over and gold isn’t needed. All the “gloom and doomers” have been wrong. QE hasn’t created hyper inflation (or even high inflation), China is growing again, Europe is under control, the US dollar is strong, the US is now producing its own oil, government revenues are up and deficit spending down, all the talk about government shenanigans is just politics as usual, businesses are figuring ways to deal with ObamaCare, etc. So, I don’t think another big effort to sink PM prices is imminent. They’ve gotten a lot of bang for their buck already. Besides, if there really is so little physical available it could back-fire.

Personally, I still don’t like the ming shares even for dollar-cost averaging. I still expect a big stock market sell-off (and not just a dip, but sustained rollover) and I can’t see the mining shares going up while the major indices are falling. I think everything will sell off at first.

Steven Pratt

The mining shares are low enough for Steve Cohen and George Soros and many insiders. There may be more downside but it’s likely the miners will move before the price of gold will. I know that’s not what’s being suggested out there but that’s my story and I’m sticking to it.

The shares led gold and silver down and I believe it will be the reverse on the swing. If true, using the POG/POS as a leading indicator will be driving forward looking in the rear view mirror.

Bruce C.

I hope your right because I’d like to get into them again and have them do well, but mining stocks are still just stocks and subject to all the same factors as all the others, and them some. I’m nervous about how much I don’t know, and am suspicious of this “obvious” and well known opportunity to buy super low and then sell super high when gold skyrockets. Heck, the mining shares might be manipulated too, which would be fairly easy to do since it’s such a relatively small market. If I didn’t have money tied up 401ks and IRAs I wouldn’t bother with them because I think the financial system is going to blow up sooner than later and then all bets are off in terms of paper contracts being honored, devalued fiat currency and all the rest. But since I do have money that I can’t access I guess I’ll hedge my bets with it and hope for the best. They’re at least out of favor now and seemingly cheap compared to just about everything else.

Thanks for your commentary on our chart John, we do agree. In the short run, commercial banks can still hit spot prices to the downside.

But for the longterm bullion buyers the fundamentals will eventually play out in their favor ( saving and increasing their wealth positions ). It has long been Mike Maloney’s belief that we will see a new monetary system by 2020. In the upheaval leading to the change in monetary systems, gold and silver should account for many a monetary abuse we have witnessed since 1980.

Every time the japanese yen makes a new LOW, gold also makes a new LOW. Can you say, “Stupid Hedge Fund liquidating its carry-trade position in Gold, to pay back its loan and cut its losses, in depreciated YEN?” This will continue until the YEN his 120/dollar.

Robert

It is tiresome to always hear, whenever there is a major gold sell-off (as in 1981) that the gold market is manipulated by the Comex and the Gov, even though Lord knows they try.

If the Gov really wants to trash gold there is only one way to do it. That is to sell the 7,000 tons of reserves they claim to have.

Again and forever; Even though the paper traders enjoy 100-1 leverage, because they almost never buy or sell physical product, no matter how levered they are, these are only side bets as to where the POG is going.

In reality the fall of gold has come from the sale of hundreds of tons of real product coming out of ETFs in the US alone. To counter that has been the buying of not tons but ounces by Western gold bugs and mostly Asians. It takes the buying of a lot of ounces to absorb the sale of tons.

If you are a gold investor long term here is the most important figure to watch. Westerners (outside of central banks) have maybe 2,000 tons of gold that can still be theoretically sold. On the other hand Indians and Chinese own 20,000 tons of gold and are still aggressive buyers.

The Westerners who own this gold are mostly institutions and they sell tonnage quickly. Easterners are mostly housewives who buy by the ounce whenever the family has some extra Yuan or Rupiahs.

While no one knows how many tons of gold Western institutions are going to offload (of their 2,000 tons) in the coming months or years, it will take some time for Easterners to absorb ounce by ounce what they put on the market.

In the unlikely event that Western institutions sell all of their gold, over time it is all going to go into the very strong hands of Asian housewives. At that time Western institutions will have no more to sell and Asians will determine the price.

Of course we are not likely to get to that zero point of Western Institutional gold ownership, but I am giving it as an example to show that unlike 1981 there is real floor in the market and once weak handed Western institutions have finished their sales then the real price of gold will be determined in Asia. And then you can be sure it will go up.

If at that time Western institutions decide to jump on the buy bandwagon again as they did in the decade of the 2000s then the POG will rocket up.

Jerry

Robert where did you get that 20,000 vs 2,000 figure? It doesn’t surprise me just wonder what your source is.

Robert

The media always reports SPDR GLD, which has around (after all of the recent sales) 1,000 tons. When I have read aggregate ETF holdings it has always been around double GLD which is simply the biggest.

Julian Phillips the South African gold analyst who ONLY covers the physical market and rightfully does his best to ignore the COMEX casino reported the 20,000 tons of Indian and Chinese gold holdings.

Now since he was not specific, I assume this includes the holdings of the Chinese and Indian central banks. But unlike in the West, these central banks don’t hold much. The real holdings are with housewives throughout the upper and middle classes of these countries. It is mostly bought as “jewelry”. Jewelry there however is typically made in 24 karat gold at a minimum cost over the melt value. So it is bought and sold like Americans buy and sell bullion coins.

Another example is of freshly mined gold. About 50% goes to China and India. The US with all of the talk, talk endless talk even at the $1,900 +. price buys only about 7% of yearly mine production.

That is why it is always best to ignore Western media including a lot of gold bug media because Westerners have TRADING in their blood. Easterners have GOLD in their blood.

Indian housewives pay no attention to technical charts. Those are ALWAYS for traders. They simply buy gold, more when it is cheaper and less when it pricier, just as they would for buying meats or spices.

Think of how much technical mumble jumble with endless graphs is in the “gold bug” press in the West. Why? People who hold their wealth in gold don’t need them. They buy more when its cheap, less when its dear.

Asians know it. Westerners don’t. So Asians will wind up with the gold.

Steven Pratt

Robert, you are mistaken. Gold was not sold out of the ETF, the shares were. The physical gold may have literally been taken possession of. That’s the irony of GLD. You can sell it and it can be bullish. A brilliant yet diabolical mechanism. In the fullness of time it will be exposed for what it is and many will feel foolish for having participated.

So your statement that the Gov has only one way to trash gold is also inaccurate. Read “Gibson’s Paradox” by Lawrence Summers. The Gov can manipulate interest rates to influence gold. And as you state, 100 to 1 leverage can also be increased to influence the price. There are several ways.

sculptor bill

paperpoverty….dude open a bullionvault account, fund it with as little cash as you want, buy PM ounces at 5 or 10 cents over spot (the buy sell spread). Its allocated, audited daily, insured in your name on a shelf in Switerland or Singapore etc. Small storage charge, very small transaction fee to buy /sell, and, you can use pretax money to buy pm’s through an IRA SeP set up. I bought 4 kg last night @ $736. a kilo……..you just click your mouse and do the trade. You can buy ONE GRAM at a time if you want, gold or silver. You can see the live transaction board for free just visiting the site.

Look, I have some survival silver gold and cash where I can get it quick, but if you are stacking lifesavings, you want it vaulted, liquid, tradable/convertable to fiat as needed, and beyond the US govt reach if it comes to that —if TSHTF and we go Cyprus, you want it off shore.

I hope its OK with John Rubino, that I endorse a business like BV here on the msg board, I learned about them here, and JR has sold them advertizing here too. Full disclosure

I have a SEP account with BV, and my corporation has a an account with them too. I think they are safe and well run, I’ve invested 1/4mil or so with them, I’m 75% in PM 25% cash. Why have USD in a bank? vault your wealth, banks are for paying bills only.’

PaperIsPoverty

I appreciate the advice and I do have a GoldMoney account. But currently I’m buying small amounts in person (i.e. anonymously), and that’s where you can’t find anything like the listed spot price. Finding any metal at all at the LCS has recently been an issue.

Steven Pratt

I don’t discriminate, I have both accounts. I have more faith and trust in James Turk et al, though.

honestann

I have zero faith in anyone. I especially have no faith in anyone at any company, because every single one of them will hand over your gold to any government that tells them to. As the world gets more corrupt, expect even the most trusted parties to screw you, even if they don’t want to. If some government agent shows up and demands to know where the gold is, they will be told, and they will take it. That’s where everything is going. The only real gold is real physical gold. Ditto for everything else too.

can you ls explain why you think the paper players will be overrun by the physical demand? paper seems a much bigger player than physical, so how does the smaller overrun the larger? want to understand this thinking which i see everywhere,i’m not discounting the thinking…

Bruce C.

Basically, the price of physical metal – that is the price to physically receive and take possession of it – will eventually far exceed the price of the paper derivatives which are based upon the assumption that most paper investors will not demand physical delivery of the underlying metal at the same time.

The paper derivatives are very analogous to fractional reserve banking in that only a small fraction (about 10%) of the total deposits at a bank need to be held as physical cash. The bankers assume that no more than 10% of their deposits will ever be demanded by their depositors. That’s why “bank runs” are a potential problem, because the banks wouldn’t have the cash to meet the demand. Supposedly the derivative products based on gold are leveraged about 100-to-1, which implies that the ETFs (or whatever) have only 1% of their total investment revenue is backed by physical gold. If their investors begin to demand more physical than that then they have to obtain more to cover it and that is when potential problems will start. The physical gold may not be available, or available quickly enough, or the price may be very high, etc. It can quickly get out of hand and cause a kind of feeding frenzy, much like a bank run can. That is why you are beginning to hear about people being forced to accept settlement in fiat currency in lieu of physical delivery. That’s when it becomes more obvious that GLD investors, for example, really don’t own gold at all. They own only a claim, but 99 other investors have the same claim. That’s not physically possible, only “statistically” so. It all can work okay as long as the current monetary system remains stable but as things start to break down, well…things start to break down. The owners of real assets will already be seated when the music stops.

Robert

I honestly think Bruce that you are confusing the COMEX with gold ETFs. Why do you think that any particular gold ETF is leveraged (in a way that is not clear in the prospectus), in that it does not have the gold stored for its shareholders in exact proportion to the paper value of their shares?

Bruce C.

To some extent it’s conjecture based upon what I’ve read about the subject, including the nature of ETFs themselves (being derivative products), and the purpose of creating commodity and precious metal ETFs at all, and the way almost every part of our financial system works (banking and insurance in particular.) Furthermore, as you point out, the ETF prospectuses themselves don’t specify so one has no direct legal claim to anything physical. Remember, the ETF share prices are DERIVED and are meant only to “reflect” the market price of the targeted commodity. They’ve got your money and you can get it back plus some if you time it right. What else could a trader want?

PaperIsPoverty

Suppose that GLD and SLV shares truly represented physical gold and silver held in vaults. Okay, but the big Wall St banks naked short sell everything related to precious metals, e.g. there have been times when a junior metals mining company might turn out to have 20% more shares outstanding than they ever actually issued (as documented on Financial Sense Newshour) due to “naked shorting” i.e. counterfeiting. So, even if you share none of Bruce’s concerns (though I certainly do), you’d have to expect dilution of the metals backing the shares simply due to routine Wall St shenanigans.

WorkingClass

As the purchasing power of FRN’s approaches zero there will come a time when there is a mad rush to trade them for something tangible (or something edible). Until then paper will rule. I used to think the smart money would buy all the physical silver and put the CRIMEX out of business. If that was going to happen it would have happened by now. Hold your physical for barter. You won’t be selling it for dollars when a happy meal costs $1000.00.

anand srivastava

Markets can stay insane longer than miners can stay solvent.

Expect Paper gold to crash through the profitability of miners. Till they are all bankrupt. Only mines owned by govts will be functional, as only they can keep the miners solvent through unprofitability.

http://goldcoin.net/ Kristopher Smith

I just love the “Central Bankers know exactly what they’re doing” quote next to the article. Thank you for this info.

John Rubino is an analyst and investment advisor with Bearing Asset Management, 208-874-8010, which strives to both protect clients from the coming financial crisis and position them for the opportunities that will be available at the bottom.